SEC Info - Domtar Corp. - ‘10-Q’ for 6/30/21

2020

2021

2020

(Unaudited)

Sales

i 1,010

i 802

i 1,954

i 1,833

Operating expenses

Cost of sales, excluding depreciation and amortization

i 789

i 693

i 1,598

i 1,599

Depreciation and amortization

i 53

i 56

i 107

i 114

Selling, general and administrative

i 68

i 61

i 132

i 127

Impairment of long-lived assets (NOTE 12)

i 1

—

i 7

—

Closure and restructuring costs (NOTE 12)

i 25

i 1

i 28

i 1

Asset conversion costs (NOTE 12)

i 5

—

i 13

—

Other operating loss (income), net (NOTE 8)

i 1

( i 5

)

( i 1

)

( i 3

)

i 942

i 806

i 1,884

i 1,838

Operating income (loss)

i 68

( i 4

)

i 70

( i 5

)

Interest expense, net

i 20

i 15

i 35

i 29

Non-service components of net periodic benefit cost (NOTE 7)

( i 6

)

( i 5

)

( i 12

)

( i 9

)

Earnings (loss) before income taxes and equity loss

i 54

( i 14

)

i 47

( i 25

)

Income tax expense (benefit) (NOTE 9)

i 16

( i 11

)

i 16

( i 8

)

Equity method investment loss, net of taxes

—

i 1

Earnings (loss) from continuing operations

i 38

( i 3

)

i 31

( i 18

)

(Loss) earnings from discontinued operations,

net of taxes (NOTE 3)

( i 1

)

i 22

( i 23

)

i 42

Net earnings

i 37

i 19

i 8

i 24

Per common share (in dollars) (NOTE 6)

Basic net earnings

Earnings (loss) from continuing operations

i 0.76

( i 0.05

)

i 0.59

( i 0.32

)

(Loss) earnings from discontinued operations

( i 0.02

)

i 0.39

( i 0.44

)

i 0.75

Basic net earnings

i 0.74

i 0.34

i 0.15

i 0.43

Diluted net earnings

Earnings (loss) from continuing operations

i 0.75

( i 0.05

)

i 0.59

( i 0.32

)

(Loss) earnings from discontinued operations

( i 0.02

)

i 0.39

( i 0.44

)

i 0.75

Diluted net earnings

i 0.73

i 0.34

i 0.15

i 0.43

Weighted average number of common shares

outstanding (millions)

Basic

i 50.3

i 55.2

i 51.9

i 55.6

Diluted

i 50.5

i 55.3

i 52.1

i 55.7

Cash dividends per common share

—

i 0.46

—

i 0.91

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

For the three months ended

For the six months ended

June 30,

2020

2021

2020

(Unaudited)

Net earnings

i 37

i 19

i 8

i 24

Other comprehensive income (loss) (NOTE 14):

Net derivative gains (losses) on cash flow hedges:

Net gains (losses) arising during the period,

net of tax of $( i 5) and $( i 8), respectively

(2020 – $( i 9) and $ i 7, respectively)

i 18

i 29

i 27

( i 20

)

Less: Reclassification adjustment for (gains) losses

included in net earnings, net of tax of $ i 3 and $ i 2,

respectively (2020 – $( i 2) and $( i 4), respectively)

( i 12

)

i 6

( i 14

)

i 13

Foreign currency translation adjustments

i 12

i 39

i 84

( i 35

)

Change in unrecognized gains and prior service cost related

to pension and post-retirement benefit plans, net of tax of

$( i 7) and $( i 8), respectively (2020 – nil and $( i 1), respectively)

i 20

i 2

i 25

i 3

Other comprehensive income (loss)

i 38

i 76

i 122

( i 39

)

Comprehensive income (loss)

i 75

i 95

i 130

( i 15

)

The accompanying notes are an integral part of the consolidated financial statements.

DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	At
	June 30,			December 31,
	2021			2020
	(Unaudited)
	$			$
Assets
Current assets
Cash and cash equivalents		i 346			i 309
Receivables, less allowances of $ i 4 and $ i 6		i 520			i 380
Inventories (NOTE 10)		i 617			i 630
Prepaid expenses		i 67			i 50
Income and other taxes receivable		i 44			i 54
Current assets held for sale (NOTE 3)		—			i 1,133
Total current assets		i 1,594			i 2,556
Property, plant and equipment, net		i 2,040			i 2,023
Operating lease right-of-use assets (NOTE 11)		i 50			i 59
Intangible assets, net		i 29			i 29
Other assets		i 209			i 189
Total assets		i 3,922			i 4,856
Liabilities and shareholders' equity
Current liabilities
Trade and other payables		i 539			i 484
Income and other taxes payable		i 19			i 15
Operating lease liabilities due within one year (NOTE 11)		i 19			i 20
Long-term debt due within one year		i 1			i 13
Current liabilities held for sale (NOTE 3)		—			i 295
Total current liabilities		i 578			i 827
Long-term debt		i 503			i 1,084
Operating lease liabilities (NOTE 11)		i 44			i 50
Deferred income taxes and other		i 334			i 321
Other liabilities and deferred credits		i 290			i 314
Commitments and contingencies (NOTE 16)
Shareholders' equity (NOTE 15)
Common stock $ i i 0.01 / par value; authorized i i 2,000,000,000 / shares; issued i 65,001,104 and i 65,001,104 shares		i 1			i 1
Treasury stock $ i i 0.01 / par value; i 14,644,774 and i 9,806,566 shares		—			—
Additional paid-in capital		i 1,500			i 1,717
Retained earnings		i 854			i 846
Accumulated other comprehensive loss		( i 182	)		( i 304	)
Total shareholders' equity		i 2,173			i 2,260
Total liabilities and shareholders' equity		i 3,922			i 4,856

The accompanying notes are an integral part of the consolidated financial statements.

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

For the three months ended

Issued and outstanding common shares

(millions of shares)

Common stock, at par

Additional paid-in capital

Retained

earnings

Accumulated other comprehensive loss

Total shareholders' equity

(Unaudited)

Balance at March 31, 2021

i 50.2

i 1

i 1,493

i 817

( i 220

)

i 2,091

Stock-based compensation, net of tax

i 0.2

—

i 7

—

i 7

Net earnings

—

i 37

—

i 37

Net derivative gains on cash flow hedges:

Net gains arising during the period,

net of tax of $( i 5)

—

i 18

Less: Reclassification adjustment for gains

included in net earnings, net of tax of $ i 3

—

( i 12

)

( i 12

)

Foreign currency translation adjustments

—

i 12

Change in unrecognized gains and prior service cost

related to pension and post-retirement benefit

plans, net of tax of $( i 7)

—

i 20

Balance at June 30, 2021

i 50.4

i 1

i 1,500

i 854

( i 182

)

i 2,173

For the six months ended

Issued and outstanding common shares

(millions of shares)

Common stock, at par

Additional paid-in capital

Retained

earnings

Accumulated other comprehensive loss

Total shareholders' equity

(Unaudited)

Balance at December 31, 2020

i 55.2

i 1

i 1,717

i 846

( i 304

)

i 2,260

Stock-based compensation, net of tax

i 0.3

—

i 6

—

i 6

Net earnings

—

i 8

—

i 8

Net derivative gains on cash flow hedges:

Net gains arising during the period,

net of tax of $( i 8)

—

i 27

Less: Reclassification adjustment for gains

included in net earnings, net of tax of $ i 2

—

( i 14

)

( i 14

)

Foreign currency translation adjustments

—

i 84

Change in unrecognized gains and prior service cost

related to pension and post-retirement benefit

plans, net of tax of $( i 8)

—

i 25

Stock repurchase

( i 5.1

)

—

( i 223

)

—

( i 223

)

Balance at June 30, 2021

i 50.4

i 1

i 1,500

i 854

( i 182

)

i 2,173

The accompanying notes are an integral part of the consolidated financial statements.

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

For the three months ended

Issued and outstanding common shares

(millions of shares)

Common stock, at par

Additional paid-in capital

Retained

earnings

Accumulated other comprehensive loss

Total shareholders' equity

(Unaudited)

Balance at March 31, 2020

i 55.2

i 1

i 1,710

i 978

( i 508

)

i 2,181

Stock-based compensation, net of tax

—

i 1

—

i 1

Net earnings

—

i 19

—

i 19

Net derivative gains on cash flow hedges:

Net gains arising during the period,

net of tax of $( i 9)

—

i 29

Less: Reclassification adjustment for losses

included in net earnings, net of tax of $( i 2)

—

i 6

Foreign currency translation adjustments

—

i 39

Change in unrecognized gains and prior service cost

related to pension and post-retirement benefit

plans, net of tax of nil

—

i 2

Balance at June 30, 2020

i 55.2

i 1

i 1,711

i 997

( i 432

)

i 2,277

For the six months ended

Issued and outstanding common shares

(millions of shares)

Common stock, at par

Additional paid-in capital

Retained

earnings

Accumulated other comprehensive loss

Total shareholders' equity

(Unaudited)

Balance at December 31, 2019

i 56.9

i 1

i 1,770

i 998

( i 393

)

i 2,376

Stock-based compensation, net of tax

i 0.1

—

Net earnings

—

i 24

—

i 24

Net derivative losses on cash flow hedges:

Net losses arising during the period,

net of tax of $ i 7

—

( i 20

)

( i 20

)

Less: Reclassification adjustment for losses

included in net earnings, net of tax of $( i 4)

—

i 13

Foreign currency translation adjustments

—

( i 35

)

( i 35

)

Change in unrecognized gains and prior service cost

related to pension and post-retirement benefit

plans, net of tax of $( i 1)

—

i 3

Stock repurchase

( i 1.8

)

—

( i 59

)

—

( i 59

)

Cash dividends declared

—

( i 25

)

—

( i 25

)

Balance at June 30, 2020

i 55.2

i 1

i 1,711

i 997

( i 432

)

i 2,277

The accompanying notes are an integral part of the consolidated financial statements.

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

	For the six months ended
	June 30, 2021			June 30, 2020
	(Unaudited)
	$			$
Operating activities
Net earnings		i 8			i 24
Adjustments to reconcile net earnings to cash flows from operating activities
Depreciation and amortization		i 117			i 143
Deferred income taxes and tax uncertainties (NOTE 9)		( i 4	)		( i 12	)
Impairment of long-lived assets (NOTE 12)		i 7			—
Net loss on disposition of discontinued operations (NOTE 3)		i 33			—
Stock-based compensation expense		i 4			i 3
Equity method investment loss, net		—			i 1
Make-whole premium on repayment of long-term debt		i 11			—
Other		i 6			—
Changes in assets and liabilities, excluding the effect of acquisition and sale of business
Receivables		( i 137	)		i 42
Inventories		i 18			i 20
Prepaid expenses		i 1			i 2
Trade and other payables		i 32			( i 95	)
Income and other taxes		i 12			i 40
Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense		( i 8	)		( i 1	)
Other assets and other liabilities		( i 10	)		( i 12	)
Cash flows from operating activities		i 90			i 155
Investing activities
Additions to property, plant and equipment		( i 122	)		( i 102	)
Proceeds from disposals of property, plant and equipment		i 1			—
Proceeds from sale of business, net of cash disposed (NOTE 3)		i 897			—
Acquisition of business, net of cash acquired		—			( i 30	)
Cash flows provided from (used for) investing activities		i 776			( i 132	)
Financing activities
Dividend payments		—			( i 51	)
Stock repurchase		( i 223	)		( i 59	)
Net change in bank indebtedness		—			( i 10	)
Change in revolving credit facility		—			( i 80	)
Proceeds from receivables securitization facility		—			i 25
Repayments of receivables securitization facility		—			( i 80	)
Issuance of long-term debt		—			i 300
Repayments of long-term debt, including make-whole premium		( i 606	)		—
Other		—			( i 4	)
Cash flows (used for) provided from financing activities		( i 829	)		i 41
Net increase in cash and cash equivalents		i 37			i 64
Impact of foreign exchange on cash		—			( i 1	)
Cash and cash equivalents at beginning of period		i 309			i 61
Cash and cash equivalents at end of period		i 346			i 124
Supplemental cash flow information
Net cash payments (refund) for:
Interest (including $ i 11 million of make-whole premium in 2021)		i 37			i 25
Income taxes		i 1			( i 24	)

The accompanying notes are an integral part of the consolidated financial statements.

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1	BASIS OF PRESENTATION	10

NOTE 2	RECENT ACCOUNTING PRONOUNCEMENTS	11

NOTE 3	DISCONTINUED OPERATIONS	12

NOTE 4	ACQUISITION OF BUSINESS	15

NOTE 5	DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT	16

NOTE 6	EARNINGS PER COMMON SHARE	21

NOTE 7	PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS	22

NOTE 8	OTHER OPERATING LOSS (INCOME), NET	24

NOTE 9	INCOME TAXES	25

NOTE 10	INVENTORIES	26

NOTE 11	LEASES	27

NOTE 12	CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS	30

NOTE 13	LONG-TERM DEBT	32

NOTE 14	CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT	33

NOTE 15	SHAREHOLDERS’ EQUITY	36

NOTE 16	COMMITMENTS AND CONTINGENCIES	37

NOTE 17	SEGMENT DISCLOSURES	40

NOTE 18	SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION	41

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 1.

_________________

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first six months of the year may not necessarily be indicative of full-year results. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission. The December 31, 2020 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

FUTURE ACCOUNTING CHANGES

TRANSITION AWAY FROM INTERBANK OFFERED RATES

On March 12, 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The amendments in the ASU are elective and apply to entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. An entity may elect to apply the amendments prospectively through December 31, 2022.

The Company has begun its impact assessment and while its evaluation of this guidance is in the early stages, the Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3.

DISCONTINUED OPERATIONS

Sale of Personal Care business

On March 1, 2021, Domtar completed the previously announced sale of the Company’s Personal Care business to American Industrial Partners (“AIP”) for a purchase price of $ i 920 million in cash, including elements of working capital estimated at $ i 130 million, subject to customary adjustments. Domtar received a net amount of $ i 897 million, which represents the selling price minus the estimated settlements of the net indebtedness and other elements of working capital adjustments. In connection with the sale, the Company entered into Transition Services Agreements with AIP pursuant to which the Company agreed to provide various back-office and information technology support until the business is fully separated from Domtar.

The results of operations of the Company’s Personal Care business were reclassified to discontinued operations. These results have been summarized in (Loss) earnings from discontinued operations, net of taxes on the Company’s Consolidated Statements of Earnings and Comprehensive Income (Loss) for each period presented. The Consolidated Statements of Cash Flows were not reclassified to reflect discontinued operations. Personal Care was previously disclosed as a separate reportable business segment.

Major components of (loss) earnings from discontinued operations:

For the three months ended

For the six months ended

June 30,

2020

2021

2020

Sales

—

i 229

i 154

i 495

Operating expenses

Cost of sales, excluding depreciation and amortization

—

i 163

i 111

i 359

Depreciation and amortization

—

i 15

i 10

i 29

Selling, general and administrative

—

i 32

i 24

i 68

Closure and restructuring costs

—

i 1

—

Other operating loss, net

—

i 1

—

i 211

i 147

i 457

Operating income

—

i 18

i 7

i 38

Net loss on disposition of discontinued operations

( i 1

)

—

( i 33

)

—

(Loss) earnings from discontinued operations before

income taxes

( i 1

)

i 18

( i 26

)

i 38

Income tax benefit

—

( i 4

)

( i 3

)

( i 4

)

Net (loss) earnings from discontinued operations

( i 1

)

i 22

( i 23

)

i 42

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3 – DISCONTINUED OPERATIONS (CONTINUED)

Major classes of assets and liabilities classified as held for sale in the accompanying Balance Sheets were as follows:

	At
	December 31,
	2020
	$
Assets
Receivables		i 110
Inventories		i 138
Prepaid expenses		i 3
Income and other taxes receivable		i 3
Property, plant and equipment, net		i 351
Operating lease right-of-use assets		i 15
Intangible assets, net ⁽²⁾⁽³⁾		i 554
Other assets		i 2
Total assets		i 1,176
Loss on classification as held for sale		( i 43	)
Total assets of the disposal group classified as held for sale on the Consolidated Balance Sheets ⁽¹⁾		i 1,133

Liabilities
Trade and other payables		i 128
Income and other taxes payable		i 12
Operating lease liabilities due within one year		i 8
Long-term debt		i 1
Operating lease liabilities		i 8
Deferred income taxes and other		i 130
Other liabilities and deferred credits		i 8
Total liabilities of the disposal group classified as held for sale on the Consolidated Balance Sheets ⁽¹⁾		i 295

⁽¹⁾

Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company’s Consolidated Balance Sheet at December 31, 2020.

⁽²⁾

Intangible assets, net at December 31, 2020 are comprised of $ i 290 million of indefinite-lived assets and $ i 264 million of definite-lived assets.

⁽³⁾

Indefinite-lived intangible assets of the disposal group held for sale consists of trade names ($ i 248 million) and catalog rights ($ i 42 million) following the business acquisitions in the Company’s former Personal Care segment.

Cash Flows from Discontinued Operations:

	For the six months ended
	June 30,			June 30,
	2021			2020
	$			$
Cash flows from operating activities		i 16			i 42
Cash flows used for investing activities		( i 3	)		( i 16	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3 – DISCONTINUED OPERATIONS (CONTINUED)

Use of proceeds

The Company used $ i 223 million of the proceeds to repurchase shares (see Note 15 “Shareholder’s equity” for more details). Additionally, the Company repaid the $ i 294 million of outstanding indebtedness under its Term Loan Agreement and redeemed the 4.4% Notes, originally due in 2022, at a redemption price of i 100% of the principal amount of $ i 300 million, plus accrued and unpaid interest, as well as a make-whole premium of $ i 11 million (see Note 13 “Long-term debt” for more details).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4.

_________________

ACQUISITION OF BUSINESS

Purchase of Appvion Point of Sale business

On April 27, 2020, Domtar Corporation completed the acquisition of the Point of Sale paper business from Appvion Operation Inc. The business includes the coater and related equipment located at Appvion’s West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property and assumed liabilities related to post-retirement benefits. The results of this business have been included in the consolidated financial statements as of April 27, 2020. The purchase price was $ i 20 million in cash plus the book value of raw materials and finished goods inventory, subject to post-closing adjustments. The acquisition was accounted for as a business combination under the acquisition method of accounting. The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s estimates of their fair value, which was based on information currently available.

The table below illustrates the purchase price allocation:

Fair value of net assets acquired at the date of acquisition
Inventories	$	i 11
Property, plant and equipment		i 23
Operating lease right-of-use assets		i 2
Total assets		i 36

Less: Assumed Liabilities		i 6

Fair value of net assets acquired at the date of acquisition		i 30

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5.

________________

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

HEDGING PROGRAMS

The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, interest rates and prices of the Company’s common stock with regard to the Company’s stock-based compensation program. To the extent the Company decides to manage the volatility related to these exposures, the Company may enter into various financial derivatives that are accounted for under the derivatives and hedging guidance. These transactions are governed by the Company's hedging policies which provide direction on acceptable hedging activities, including instrument type and acceptable counterparty exposure.

Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company is exposed to credit risk on accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of June 30, 2021, i two customers located in the U.S. represented i 16% or $ i 83 million, and i 12% or $ i 64 million, respectively, of the Company’s receivables (December 31, 2020 – i two customers located in the U.S. represented i 15% or $ i 58 million, and i 12% or $ i 46 million, respectively).

The Company is exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that are believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored.

INTEREST RATE RISK

The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, bank indebtedness, revolving credit facility, securitization and long-term debt. The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.

EQUITY RISK

The Company is exposed to changes in share prices with regard to its stock-based compensation program. The Company manages its exposure through the use of derivative instruments such as equity swap contracts. In March 2020, the Company entered into a total return swap agreement covering i 500,000 common shares maturing on i March 4, 2022.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

COST RISK

Cash flow hedges:

The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over the next i 30 months.

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of June 30, 2021 to hedge forecasted purchases:

Commodity

Notional contractual quantity

under derivative contracts

MMBtu⁽²⁾

Notional contractual value

under derivative contracts

(in millions of dollars)

Percentage of forecasted

purchases under

derivative contracts

Natural gas

2021 ⁽¹⁾

i 4,490,000

i 13

i 37%

2022

i 9,270,000

i 25

i 35%

2023

i 4,210,000

i 12

i 15%

⁽¹⁾	Represents the remaining six months of 2021

⁽²⁾	MMBtu: Millions of British thermal units

The natural gas derivative contracts were effective as of June 30, 2021.

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States and Canada. As a result, it is exposed to movements in foreign currency exchange rates in Canada. Moreover, certain assets and liabilities are denominated in Canadian dollars and are exposed to foreign currency movements. Accordingly, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to i three years. The Company may use derivative financial instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

Derivatives are used to hedge forecasted purchases in Canadian dollars by the Company’s Canadian subsidiary over the next i 22 months. Such derivatives are designated as cash flow hedges. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects earnings.

The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of June 30, 2021 to hedge forecasted purchases and sales:

Currency exposure hedged

Year of

maturity

Notional

contractual value

Percentage of

forecasted net

exposures under

contracts

Average

Protection rate

Average

Obligation rate

CAD/USD

2021⁽¹⁾

i 353 CAD

i 74%

1 USD = 1.3222

1 USD = 1.3409

CAD/USD

2022

i 499 CAD

i 53%

1 USD = 1.3164

1 USD = 1.3302

CAD/USD

2023

i 85 CAD

i 9%

1 USD = 1.2655

⁽¹⁾Represents the remaining six months of 2021

The foreign exchange derivative contracts were effective as of June 30, 2021.

FAIR VALUE MEASUREMENT

The accounting standards for fair value measurements and disclosures establish a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (b) and (c) below) at June 30, 2021 and December 31, 2020, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair Value of financial instruments at:

Quoted prices in

active markets for

identical assets

(Level 1)

Significant

observable

inputs

(Level 2)

Significant

unobservable

inputs

(Level 3)

Balance sheet classification

Derivatives designated as

hedging instruments:

Asset derivatives

Currency derivatives

i 37

—

i 37

—

(a)

Prepaid expenses

Natural gas swap contracts

i 6

—

i 6

—

(a)

Prepaid expenses

Currency derivatives

i 9

—

i 9

—

(a)

Other assets

Natural gas swap contracts

i 2

—

i 2

—

(a)

Other assets

Total Assets

i 54

—

i 54

—

Liabilities derivatives

Currency derivatives

i 1

—

i 1

—

(a)

Trade and other payables

Total Liabilities

i 1

—

i 1

—

Other Instruments:

Stock-based compensation -

liability awards

i 4

—

Trade and other payables

Stock-based compensation -

liability awards

i 13

—

Other liabilities and deferred credits

Equity swap contracts

i 14

—

Other assets

Long-term debt due

within one year

i 1

—

i 1

—

(b)

Long-term debt due within one year

Long-term debt

i 564

—

i 564

—

(c)

Long-term debt

The net cumulative gain recorded in Accumulated other comprehensive loss relating to natural gas contracts is $ i 8 million at June 30, 2021, of which a gain of $ i 6 million is expected to be recognized in Cost of sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at June 30, 2021.

The net cumulative gain recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $ i 45 million at June 30, 2021, of which a gain of $ i 36 million is expected to be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at June 30, 2021.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value of financial instruments at:

December 31, 2020

Quoted prices in

active markets for

identical assets

(Level 1)

Significant

observable

inputs

(Level 2)

Significant

unobservable

inputs

(Level 3)

Balance sheet classification

Derivatives designated as

hedging instruments:

Asset derivatives

Currency derivatives

i 31

—

i 31

—

(a)

Prepaid expenses

Currency derivatives

i 16

—

i 16

—

(a)

Other assets

Natural gas swap contracts

i 1

—

i 1

—

(a)

Other assets

Total Assets

i 48

—

i 48

—

Liabilities derivatives

Currency derivatives

i 1

—

i 1

—

(a)

Trade and other payables

Natural gas swap contracts

i 2

—

i 2

—

(a)

Trade and other payables

Natural gas swap contracts

i 3

—

i 3

—

(a)

Other liabilities and deferred credits

Total Liabilities

i 6

—

i 6

—

Other Instruments:

Stock-based compensation -

liability awards

i 5

—

Trade and other payables

Stock-based compensation -

liability awards

i 11

—

Other liabilities and deferred credits

Equity swap contracts

i 2

Other assets

Long-term debt due

within one year

i 13

—

i 13

—

(b)

Long-term debt due within one year

Long-term debt

i 1,221

—

i 1,221

—

(c)

Long-term debt

(a)	Fair value of the Company’s derivatives are classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows:

For currency derivatives: Foreign currency forward and option contracts are valued using standard valuation models. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques.

For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates.

(b)

Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at June 30, 2021 and December 31, 2020. The carrying value of the Company’s long-term debt due within one year is $ i 1 million and $ i 13 million at June 30, 2021 and December 31, 2020, respectively.

(c)	The carrying value of the Company’s long-term debt is $ i 503 million and $ i 1,084 million at June 30, 2021 and December 31, 2020, respectively.

Due to their short-term maturity, the carrying amounts of cash and cash equivalents, receivables, bank indebtedness, trade and other payables and income and other taxes approximate their fair values.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 6.

_________________

EARNINGS PER COMMON SHARE

The following table provides the reconciliation between basic and diluted earnings per common share:

	For the three months ended						For the six months ended
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2021			2020
Earnings (loss) from continuing operations	$	i 38		$	( i 3	)	$	i 31		$	( i 18	)
(Loss) earnings from discontinued operations, net of taxes	$	( i 1	)	$	i 22		$	( i 23	)	$	i 42
Net earnings	$	i 37		$	i 19			i 8			i 24
Weighted average number of common shares outstanding (millions)		i 50.3			i 55.2			i 51.9			i 55.6
Effect of dilutive securities (millions)		i 0.2			i 0.1			i 0.2			i 0.1
Weighted average number of diluted common shares outstanding (millions)		i 50.5			i 55.3			i 52.1			i 55.7

Basic net earnings per common share (in dollars)
Earnings (loss) from continuing operations	$	i 0.76		$	( i 0.05	)	$	i 0.59		$	( i 0.32	)
(Loss) earnings from discontinued operations	$	( i 0.02	)	$	i 0.39		$	( i 0.44	)	$	i 0.75
Basic net earnings per common share	$	i 0.74		$	i 0.34		$	i 0.15		$	i 0.43

Diluted net earnings per common share (in dollars)
Earnings (loss) from continuing operations	$	i 0.75		$	( i 0.05	)	$	i 0.59		$	( i 0.32	)
(Loss) earnings from discontinued operations	$	( i 0.02	)	$	i 0.39		$	( i 0.44	)	$	i 0.75
Diluted net earnings per common share	$	i 0.73		$	i 0.34		$	i 0.15		$	i 0.43

The following table provides the securities that could potentially dilute basic earnings per common share in the future, but were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive:

For the three months ended

For the six months ended

June 30,

2020

2021

2020

Options to purchase common shares

—

i 409,776

i 76,123

i 409,776

/ /

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7.

_________________

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and six months ended June 30, 2021, the pension expense was $ i 8 million and $ i 18 million, respectively (2020 – $ i 8 million and $ i 19 million, respectively).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joining the Company after January 1, 1998 participate in a defined contribution pension plan. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Unionized and non-union hourly employees in the U.S. who are not grandfathered under the existing defined benefit pension plans, participate in a defined contribution pension plan for future service. The Company also sponsors a number of other post-retirement benefit plans for eligible U.S. and non-U.S. employees; the plans are unfunded and include life insurance programs and medical and dental benefits. The Company also provides supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution pension plans to certain senior management employees.

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:

For the three months ended

For the six months ended

Pension plans

Other post-retirement benefit plans

Pension plans

Other post-retirement benefit plans

Service cost

i 7

—

i 14

—

Interest expense

i 8

i 1

i 16

i 1

Expected return on plan assets

( i 17

)

—

( i 33

)

—

Amortization of net actuarial loss (gain)

i 2

( i 1

)

i 4

( i 1

)

Settlement loss

i 1

—

i 1

—

Amortization of prior year service costs

i 1

—

i 1

—

Net periodic benefit cost

i 2

—

i 3

—

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:

For the three months ended

For the six months ended

Pension plans

Other post-retirement benefit plans

Pension plans

Other post-retirement benefit plans

Service cost

i 7

i 1

i 14

i 1

Interest expense

i 9

i 1

i 20

i 1

Expected return on plan assets

( i 17

)

—

( i 34

)

—

Amortization of net actuarial loss (gain)

i 2

( i 1

)

i 4

( i 1

)

Amortization of prior year service costs

i 1

—

i 1

—

Net periodic benefit cost

i 2

i 1

i 5

i 1

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

The components of net periodic benefit cost for pension plans and other post-retirement benefits plans, other than service cost, are presented in Non-service components of net periodic benefit cost on the Consolidated Statement of Earnings and Comprehensive Income (Loss).

For the three and six months ended June 30, 2021, the Company contributed $ i 5 million and $ i 8 million, respectively (2020 – $ i 2 million and $ i 4 million, respectively) to the pension plans and $ i 1 million and $ i 2 million, respectively (2020 – $ i 1 million and $ i 2 million, respectively) to the other post-retirement benefit plans.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 8.

_________________

OTHER OPERATING LOSS (INCOME), NET

Other operating loss (income), net is an aggregate of both recurring and non-recurring loss or income items and, as a result, can fluctuate from period to period. i The Company’s other operating loss (income), net includes the following:

	For the three months ended					For the six months ended
	June 30,		June 30,			June 30,			June 30,
	2021		2020			2021			2020
	$		$			$			$
Bad debt expense		—		i 1			( i 2	)		i 5
Environmental provision		—		—			i 1			i 1
Non-production agreement terminated		—		( i 7	)		—			( i 7	)
Foreign exchange loss (gain)		i 1		i 1			i 2			( i 1	)
Other		—		—			( i 2	)		( i 1	)
Other operating loss (income), net		i 1		( i 5	)		( i 1	)		( i 3	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9.

_________________

INCOME TAXES

For the second quarter of 2021, the Company’s income tax expense was $ i 16 million, consisting of a current income tax expense of $ i 16 million and i no deferred income tax expense. This compares to an income tax benefit of $ i 11 million in the second quarter of 2020, consisting of a current income tax benefit of $ i 2 million and a deferred income tax benefit of $ i 9 million. The Company made income tax payments, net of refunds, of $ i 8 million during the second quarter of 2021. The effective tax rate for the second quarter of 2021 was i 30% compared with an effective tax rate of i 79% in the second quarter of 2020. The effective tax rate for the second quarter of 2021 was impacted by certain transaction costs incurred during the quarter related to the potential acquisition of the Company by Paper Excellence which provided i no tax benefit. The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate and then adjusting for discrete items arising in that quarter. In each interim quarter the Company updates its estimate of the annual effective tax rate and, if the estimated annual tax rate changes, makes a cumulative adjustment in that quarter. The effective tax rate for the second quarter of 2020 was significantly impacted by such an adjustment. The effective tax rate for the second quarter of 2020 was also favorably impacted by the recognition of additional tax credits in various jurisdictions, as well as by the CARES Act, which granted the ability to carry back tax losses generated in the U.S. in 2020 to a tax year with a higher statutory tax rate.

For the first six months of 2021, the Company’s income tax expense was $ i 16 million, consisting of a current income tax expense of $ i 15 million and a deferred income tax expense of $ i 1 million. This compares to an income tax benefit of $ i 8 million in the first six months of 2020, consisting of a current income tax benefit of $ i 5 million and a deferred income tax benefit of $ i 3 million. The Company made income tax payments, net of refunds, of $ i 1 million during the first six months of 2021. The effective tax rate was i 34% compared to an effective tax rate of i 32% in the first six months of 2020. The effective tax rate for the first six months of 2021 was significantly impacted by certain transaction costs incurred during the period related to the potential acquisition of the Company by Paper Excellence which provided i no tax benefit. The effective tax rate for the first six months of 2020 was significantly impacted by our mix of earnings and loss in the Company’s major jurisdictions, by our recognition of additional tax credits in various jurisdictions, and by our ability to carry back U.S. tax losses generated in 2020 to a tax year with a higher statutory tax rate. These favorable impacts were partially offset by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 10.

_________________

INVENTORIES

The following table presents the components of inventories:

	June 30,		December 31,
	2021		2020
	$		$
Work in process and finished goods		i 304	i 321
Raw materials		i 103	i 107
Operating and maintenance supplies		i 210	i 202
		i 617	i 630

/ /

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11.

_________________

LEASES

In the normal course of business, the Company enters into operating and finance leases mainly for manufacturing and warehousing facilities, corporate offices, motor vehicles, mobile equipment and manufacturing equipment.

While the Company’s lease payments are generally fixed over the lease term, some leases may include price escalation terms that are fixed at the lease commencement date.

The Company has remaining lease terms ranging from i 1 year to i 12 years, some of which may include options to extend the leases for up to i 10 years, and some of which may include options to terminate the leases within i 1 year.

The components of lease expense were as follows:

	For the three months ended				For the six months ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
	$		$		$		$
Operating lease expense		i 5		i 6		i 11		i 11

Supplemental cash flow information related to leases was as follows:

For the six months ended

June 30,

2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

i 12

i 11

Operating cash flows from finance leases

i 1

—

Right-of-use assets obtained in exchange for lease liabilities:

Operating leases

i 2

i 4

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11. LEASES (CONTINUED)

Supplemental balance sheet information related to leases was as follows:

June 30,

December 31,

2020

Operating leases

Operating leases right-of-use assets

i 50

i 59

Lease liabilities due within one year

i 19

i 20

Long-term operating lease liabilities

i 44

i 50

i 63

i 70

Finance leases

Property, plant and equipment

i 11

Accumulated depreciation

( i 3

)

( i 3

)

i 8

Long-term debt due within one year

i 1

Long-term debt

i 9

i 10

Weighted-average remaining lease term

Operating leases

i 4.5 years

i 4.7 years

Finance leases

i 8.4 years

i 8.8 years

Weighted-average discount rate

Operating leases

i 4.4

Finance leases

i 6.1

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11. LEASES (CONTINUED)

Maturities of lease liabilities at June 30, 2021 were as follows:

Operating leases

Finance leases

June 30,

2021 ⁽¹⁾

i 10

i 1

2022

i 19

i 1

2023

i 15

i 2

2024

i 11

i 2

2025

i 6

i 1

Thereafter

i 9

i 5

Total lease payments

i 70

i 12

Less: Imputed interest

i 7

i 2

Total lease liabilities

i 63

i 10

⁽¹⁾

Represents the remaining six months of 2021.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12.

_________________

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

Paper Excellence to Acquire Domtar Corporation

On May 10, 2021, Domtar and Paper Excellence, a global diversified manufacturer of pulp and specialty, printing, writing, and packaging papers, entered into a business combination agreement under which the Paper Excellence group of companies will acquire all of the issued and outstanding shares of Domtar common stock for $ i 55.50 per share, in cash. The all-cash transaction represents an enterprise value of approximately $ i 3 billion. The transaction is expected to close in the second half of 2021, subject to receipt of the required regulatory approvals and other customary closing conditions. As a result, during the second quarter of 2021, the Company recorded $ i 18 million of transaction fees under Closure and restructuring costs on the Consolidated Statement of Earnings and Comprehensive Income (Loss).

Cost reduction program

The Company implemented a cost savings program. As part of this program, on August 7, 2020, the Company announced the permanent closure of the uncoated freesheet manufacturing at the Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at the Ashdown, Arkansas mill and the converting center in Ridgefields, Tennessee. Additionally, on May 7, 2021, the Company announced the closure of the converting center in Dallas, Texas. These actions reduced the Company’s annual uncoated freesheet paper capacity by approximately i 721,000 short tons, and resulted in a workforce reduction of approximately i 750 employees. The Kingsport and Ashdown paper machines, which have been idled since April 2020, did not recommence operations. The Ridgefields converting center ceased operations at the end of the third quarter of 2020, while the Port Huron mill shut down at the end of February 2021 and the Dallas converting center ceased operations at the beginning of July 2021. For the three and six months ended June 30, 2021, the Company recorded $ i 1 million and $ i 7 million, respectively, of accelerated depreciation under Impairment of long-lived assets, $ i 1 million and $ i 4 million, respectively, of severance and termination costs, $ i 1 million and $ i 1 million, respectively, of pension settlement loss and $ i 4 million and $ i 4 million, respectively, of other costs under Closure and restructuring costs on the Consolidated Statement of Earnings and Comprehensive Income (Loss).

Conversion of Kingsport, Tennessee mill

The Company plans to enter the linerboard market with the conversion of the Kingsport paper machine. Once in full operation, the mill will produce and market approximately i 600,000 tons annually of high-quality recycled linerboard and medium, providing the Company with a strategic footprint in a growing adjacent market. The conversion is expected to be completed by the end of 2022. The Company estimates the conversion cost to be approximately $ i 350 million. For the three and six months ended June 30, 2021, the Company recorded $ i 5 million and $ i 13 million, respectively, under Asset conversion costs on the Consolidated Statement of Earnings and Comprehensive Income (Loss).

Restart of the paper machine at Ashdown, Arkansas mill

On July 15, 2021, Domtar announced its intention to restart the paper machine at the Ashdown, Arkansas mill to add an additional i 185,000 tons per year of uncoated freesheet production capacity to its manufacturing network. The increase is necessary to meet growing customer demand as the economy recovers from the COVID-19 pandemic. The additional paper capacity will result in a capacity reduction of i 185,000 ADMT per year of baled SBSK pulp at the mill. However, it will not impact Ashdown's fluff pulp production capacity, or Domtar's commitment to serving its key hygiene customers around the world. Additionally, the Company has a dedicated team developing a kraft linerboard project for the Ashdown Mill, and the decision to restart the paper machine will not impact the Company's intention to produce containerboard and other packaging products at the facility. The machine is expected to resume full operation in January 2022 following a period of time to ramp up to full production. The Company estimates the restart will cost approximately $ i 10 million.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12. CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)

Other costs

During the second quarter of 2021, other costs related to previous and ongoing closures and restructuring included $ i 1 million of other costs (2020 – $ i 1 million of severance and termination costs).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 13.

_________________

LONG-TERM DEBT

4.4% UNSECURED NOTES

On April 8, 2021, the Company redeemed the i 4.4% Notes, originally due in 2022, at a redemption price of i 100% of the principal amount of $ i 300 million, plus accrued and unpaid interest, as well as a make-whole premium of $ i 11 million.

TERM LOAN

On March 11, 2021, the Company fully repaid its Term Loan Agreement, originally maturing on i May 5, 2025, in the amount of $ i 294 million and wrote-off $ i 2 million of unamortized debt issuance costs related to this repayment.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14.

_________________

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

The following table presents the changes in Accumulated other comprehensive loss by component⁽¹⁾ for the six months ended June 30, 2021 and the year ended December 31, 2020:

Net derivative

gains (losses) on

cash flow hedges

Pension items⁽²⁾

Post-retirement

benefit items⁽²⁾

Foreign currency

items

Total

Balance at December 31, 2019

( i 5

)

( i 197

)

i 11

( i 202

)

(393

)

Natural gas swap contracts

i 1

N/A

i 1

Currency options

i 3

N/A

i 3

Foreign exchange forward contracts

i 23

N/A

i 23

Net loss

N/A

( i 21

)

( i 1

)

N/A

( i 22

)

Foreign currency items

N/A

i 63

Other comprehensive income (loss)

before reclassifications

i 27

( i 21

)

( i 1

)

i 63

i 68

Amounts reclassified from Accumulated

other comprehensive loss

i 12

i 11

( i 2

)

—

i 21

Net current period other comprehensive

income (loss)

i 39

( i 10

)

( i 3

)

i 63

i 89

Balance at December 31, 2020

i 34

( i 207

)

i 8

( i 139

)

(304

)

Natural gas swap contracts

i 9

N/A

i 9

Currency options

i 3

N/A

i 3

Foreign exchange forward contracts

i 15

N/A

i 15

Net gain

N/A

i 18

—

N/A

i i 18 /

Foreign currency items

N/A

i 84

Other comprehensive income

before reclassifications

i 27

i 18

—

i 84

i 129

Amounts reclassified from Accumulated

other comprehensive loss

( i 14

)

i 8

( i 1

)

—

( i 7

)

Net current period other comprehensive

income (loss)

i 13

i 26

( i 1

)

i 84

i 122

Balance at June 30, 2021

i 47

( i 181

)

i 7

( i 55

)

(182

)

⁽¹⁾	All amounts are after tax. Amounts in parentheses indicate losses.

⁽²⁾	The projected benefit obligation is actuarially determined on an annual basis as of December 31.

/ /

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

The following tables present reclassifications out of Accumulated other comprehensive loss for the three and six months ended June 30, 2021 and 2020:

Details about Accumulated other comprehensive loss components	Amounts reclassified from Accumulated other comprehensive loss
	For the three months ended
	June 30, 2021			June 30, 2020
	$			$
Net derivative gains (losses) on cash flow hedge
Natural gas swap contracts ⁽¹⁾		( i 1	)		( i 3	)
Currency options and forwards ⁽¹⁾		i 16			( i 5	)
Total before tax		i 15			( i 8	)
Tax (expense) benefit		( i 3	)		i 2
Net of tax		i 12			( i 6	)

Amortization of defined benefit pension items
Amortization of net actuarial loss ⁽³⁾		( i 3	)		( i 2	)
Amortization of prior year service costs ⁽³⁾		( i 1	)		( i 1	)
Total before tax		( i 4	)		( i 3	)
Tax benefit		i 1			—
Net of tax		( i 3	)		( i 3	)

Amortization of other post-retirement benefit items
Amortization of net actuarial gain ⁽³⁾		i 1			i 1
Total before tax		i 1			i 1
Tax expense		—			—
Net of tax		i 1			i 1

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

	Amounts reclassified from Accumulated other comprehensive loss
	For the six months ended
	June 30, 2021			June 30, 2020
	$			$
Net derivatives gains (losses) on cash flow hedge
Natural gas swap contracts ⁽¹⁾		( i 1	)		( i 8	)
Currency options and forwards ⁽¹⁾		i 26			( i 9	)
Net investment hedge ⁽²⁾		( i 9	)		—
Total before tax		i 16			( i 17	)
Tax (expense) benefit		( i 2	)		i 4
Net of tax		i 14			( i 13	)

Amortization of defined benefit pension items
Amortization of net actuarial loss ⁽³⁾		( i 5	)		( i 4	)
Amortization of prior year service costs ⁽³⁾		( i 1	)		( i 1	)
Discontinued operations		( i 4	)		—
Total before tax		( i 10	)		( i 5	)
Tax benefit		i 2			i 1
Net of tax		( i 8	)		( i 4	)

Amortization of other post-retirement benefit items
Amortization of net actuarial gain ⁽³⁾		i 1			i 1
Total before tax		i 1			i 1
Tax expense		—			—
Net of tax		i 1			i 1

⁽¹⁾	These amounts are included in Cost of Sales in the Consolidated Statements of Earnings and Comprehensive Income (Loss).

⁽²⁾	This amount is included in (Loss) earnings from discontinued operations, net of taxes in the Consolidated Statements of Earnings and Comprehensive Income (Loss).

⁽³⁾	These amounts are included in the computation of net periodic benefit cost (see Note 7 “Pension Plans and Other Post-Retirement Benefit Plans” for more details).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 15.

_________________

SHAREHOLDERS’ EQUITY

DIVIDENDS

On i February 18, 2020, the Company’s Board of Directors approved a quarterly dividend of $ i 0.455 per share, to be paid to holders of the Company’s common stock. Total dividends of approximately $ i 25 million were paid on i April 15, 2020 to shareholders of record on i April 2, 2020. On May 5, 2020, due to the unprecedented market conditions and uncertainty caused by COVID-19, the Company suspended the payment of its regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment.

STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a stock repurchase program (the “Program”) of up to $ i 1.6 billion. The Company is authorized to repurchase, from time to time, shares of its outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock in part to reduce the dilutive effects of stock options and awards, and to improve shareholders’ returns.

The Company makes open market purchases of its common stock using general corporate funds. Additionally, the Company may enter into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements would require the Company to make up-front payments to the counterparty financial institutions, which would result in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements, depending upon the price of the stock.

On February 11, 2021, the Company announced that it would resume its stock repurchase program. The Board of Directors will continue to evaluate the Company’s capital return program based upon customary considerations, including market conditions.

On March 2, 2021, the Company announced that it entered into an accelerated share repurchase (“ASR”) agreement with JPMorgan Chase Bank, N.A. to repurchase $200 million of its common stock with available cash on hand, including cash received from the divestiture of its Personal Care segment closed on March 1, 2021.

Under the ASR agreement, the Company paid $ i 200 million in exchange for an initial delivery of i 4,430,906 shares. The final number of shares to be repurchased by Domtar will be based on the average of the daily volume-weighted average stock prices of Domtar’s common stock during the valuation period of the agreement, less a discount and subject to adjustments. The resulting adjustments may affect the total amount spent by the Company or the aggregate number of shares it repurchases.

During the first six months of 2021, in addition to the ASR, the Company repurchased i 629,959 shares at an average price of $ i 35.72 for a total cost of $ i 23 million.

During the first six months of 2020, the Company repurchased i 1,798,306 shares at an average price of $ i 33.05 for a total cost of $ i 59 million.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16.

_________________

COMMITMENTS AND CONTINGENCIES

ENVIRONMENTAL MATTERS

The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities. The Company may also incur substantial costs in relation to enforcement actions (including orders requiring corrective measures, installation of pollution control equipment or other remedial actions) as a result of violations of, or liabilities under, environmental laws and regulations applicable to its past and present properties. The Company’s ongoing efforts to identify potential environmental concerns that may be associated with such properties may result in additional environmental costs and liabilities which cannot be reasonably estimated at this time.

A former owner of the Company’s Dryden, Ontario manufacturing site (the "Dryden Property") operated a chlor-alkali plant during the 1960s and 1970s, during which time, mercury and other pollutants were used and discharged into the environment. In conjunction with the sale and redevelopment of the Dryden Property, the Province of Ontario (the “Province”) provided a broad indemnity (the "Indemnity") in 1985 to the then purchaser of the Dryden Property and its successors and assigns with respect to the discharge of any pollutants, including mercury, by the historical operators of the Dryden Property. This Indemnity subsequently was assigned to the Company in connection with its 2007 purchase of the Dryden Property.

As the current owner of the Dryden Property, the Company is actively engaged with the Province with respect to the management of the historical contamination.

The Province issued a Director's order under environmental laws to certain prior owners of the Dryden Property in connection with a nearby waste disposal site that never has been owned by the Company. The Director's order required certain work to be conducted by those prior owners. The prior owners asserted that the Indemnity covered the work required by the Director’s order. Following extensive litigation, the Supreme Court of Canada found, among other things, that the Indemnity covered third-party claims, but not first-party claims, such as the Director's order.

In the future, the Province may challenge whether the Company has the benefit of the Indemnity. In addition to the Indemnity, Domtar has other recourses relating to the historical contamination.

The situation involving the historical contamination is continuing to develop, and the Company cannot predict its outcome. While the Company currently does not believe that it will be required to incur costs that would have a material impact on its results of operations or financial condition, there is no certainty that this is in fact the case.

The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:

	June 30, 2021
	$
Balance at beginning of year		i 47
Additions and other changes		i 2
Environmental spending		( i 2	)
Balance at end of period		i 47

The U.S. Environmental Protection Agency (the “EPA”) and/or various state agencies have notified the Company that it may be a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund,” and similar state laws with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. The Company continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at a number of former operating sites due to possible soil, sediment or groundwater contamination.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)

CONTINGENCIES

In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at June 30, 2021, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

INDEMNIFICATIONS

In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, compliance with laws, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At June 30, 2021, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, i no provision has been recorded. These indemnifications have not yielded a significant expense in the past.

Pension Plans

The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. As of June 30, 2021, the Company has i not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

CLIMATE CHANGE AND AIR QUALITY REGULATION

Various national and local laws and regulations relating to climate change have been established or are emerging in jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or investments.

The EPA repealed the Clean Power Plan and replaced it with the “Affordable Clean Energy” (“ACE”) rule. The ACE rule was legally challenged in the U.S. Court of Appeals for the D.C. Circuit. The Court ruled the EPA wrongly understood the Clean Air Act vacated the ACE rule, sending it back to EPA for further consideration. The court also rejected the embedded repeal of the Clean Power Plan, but the court stayed its mandate as to that part of its decision to avoid reinstating that now outdated Clean Power Plan. Four petitions of certiorari have been filed with the United States Supreme Court seeking review of the D.C. Circuit’s decision, and the Supreme Court is expected to decide whether to take the case this Fall. Regardless of the outcome of the petitions for certiorari and EPA’s further consideration, the Company does not expect to be disproportionately affected compared with other pulp and paper producers located in the states where the Company operates.

The province of Quebec has a greenhouse gas (“GHG”) cap-and-trade system with reduction targets. British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The Company does not expect its facilities to be disproportionately affected by these measures compared to the other pulp and paper producers located in these provinces.

The Government of Canada has established a federal carbon pricing system in provinces that do not already impose a cost on carbon emissions. The Government of Canada has imposed its carbon pricing program for regulating GHG emissions in Ontario, which took effect on January 1, 2019. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario finalized its own GHG Emission Performance Standards regulation. The Canadian Government has accepted Ontario’s program as an alternative to the federal program and the transition for Ontario facilities from the federal program to the Ontario program is expected to occur on January 1, 2022. The Company does not expect to be disproportionately affected compared with other pulp and paper producers located in Ontario.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The EPA proposed to revise its Industrial Boiler Maximum Achievable Control Technology Standard (“MACT”), or Boiler MACT, in a notice published on August 24, 2020. The proposed rule is a response to two court decisions that remanded certain issues for further review by the EPA, and it includes revisions to 34 different emission limitations that could apply to some of the Company’s facilities. The EPA has indicated that it plans to issue the final rule in September 2021. Although the EPA has indicated that a small number of facilities may need to reduce emissions further compared to the current limits, the Company does not expect its facilities to be disproportionately affected compared to other U.S. pulp and paper producers.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17.

_________________

SEGMENT DISCLOSURES

Following the sale of the Company’s Personal Care business on March 1, 2021, the Company now operates as a single reportable segment as described below, which also represents its only operating segment:

•	Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, hardwood and fluff pulp, and high quality airlaid ultrathin laminated cores.

An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:

For the three months ended

For the six months ended

SEGMENT DATA

Sales by product group

Communication papers

i 498

i 385

i 986

i 1,008

Specialty and packaging papers

i 145

i 127

i 282

i 277

Market pulp

i 357

i 278

i 665

i 525

Absorbent core materials

i 10

i 12

i 21

i 23

Consolidated sales

i 1,010

i 802

i 1,954

i 1,833

Operating income (loss) from continuing operations ⁽¹⁾

Pulp and Paper

i 95

i 3

i 107

i 7

Corporate

( i 27

)

( i 7

)

( i 37

)

( i 12

)

Consolidated operating income (loss) from continuing

operations

i 68

( i 4

)

i 70

( i 5

)

Interest expense, net

i 20

i 15

i 35

i 29

Non-service components of net periodic benefit cost

( i 6

)

( i 5

)

( i 12

)

( i 9

)

Earnings (loss) before income taxes and equity loss

i 54

( i 14

)

i 47

( i 25

)

Income tax expense (benefit)

i 16

( i 11

)

i 16

( i 8

)

Equity method investment loss, net of taxes

—

i 1

Earnings (loss) from continuing operations

i 38

( i 3

)

i 31

( i 18

)

(Loss) earnings from discontinued operations, net of taxes

( i 1

)

i 22

( i 23

)

i 42

Net earnings

i 37

i 19

i 8

i 24

⁽¹⁾

The Government of Canada created the Canada Emergency Wage Subsidy (“CEWS”) to provide financial support for businesses during the COVID-19 pandemic and prevent large layoffs. For the six months ended June 30, 2021, the Company recognized $ i 6 million as a reduction of costs related to this program (CDN $ i 8 million) ($ i 5 million in Cost of sales (CDN $ i 6 million) and $ i 1 million in Selling, general and administrative (CDN $ i 2 million)).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18.

_________________

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar’s significant i 100% owned domestic subsidiaries, including Domtar Paper Company, LLC, Domtar Industries LLC (and subsidiaries, excluding Domtar Funding LLC), Domtar A.W. LLC, and EAM Corporation, (“Guarantor Subsidiaries”), on a joint and several basis. The Guaranteed Debt is not guaranteed by certain of Domtar’s foreign and non-significant domestic subsidiaries, all i 100% owned, (collectively the “Non-Guarantor Subsidiaries”). A subsidiary’s guarantee may be released in certain customary circumstances, such as if the subsidiary is sold or sells all of its assets, if the subsidiary’s guarantee of the Credit Agreement is terminated or released and if the requirements for legal defeasance to discharge the indenture have been satisfied.

Prior to the sale of the Company’s Personal Care Business on March 1, 2021, Attends Healthcare Products Inc., Associated Hygienic Products LLC and Home Delivery Incontinent Supplies Co, were Guarantor Subsidiaries.

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at June 30, 2021 and December 31, 2020, the Statements of Earnings and Comprehensive Income (Loss) for the three and six months ended June 30, 2021 and 2020 and the Statements of Cash Flows for the six months ended June 30, 2021 and 2020 for Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method.

For the three months ended

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Consolidating

AND COMPREHENSIVE INCOME

Parent

Adjustments

Consolidated

Sales

—

i 857

i 415

( i 262

)

i 1,010

Operating expenses

Cost of sales, excluding depreciation and amortization

—

i 728

i 323

( i 262

)

i 789

Depreciation and amortization

—

i 38

i 15

—

i 53

Selling, general and administrative

( i 3

)

( i 19

)

i 90

—

i 68

Impairment of long-lived assets

—

i 1

—

i 1

Closure and restructuring costs

i 15

i 9

i 1

—

i 25

Asset conversion costs

—

i 5

—

i 5

Other operating loss (income), net

i 1

( i 2

)

i 2

—

i 1

i 13

i 760

i 431

( i 262

)

i 942

Operating (loss) income

( i 13

)

i 97

( i 16

)

—

i 68

Interest expense (income), net

i 20

i 16

( i 16

)

—

i 20

Non-service components of net periodic benefit cost

—

( i 3

)

( i 3

)

—

( i 6

)

(Loss) earnings before income taxes

( i 33

)

i 84

i 3

—

i 54

Income tax expense

—

i 16

—

i 16

Share in earnings of equity accounted investees

i 70

i 2

—

( i 72

)

—

Earnings from continuing operations

i 37

i 70

i 3

( i 72

)

i 38

Loss from discontinued operations, net of taxes

—

( i 1

)

—

( i 1

)

Net earnings

i 37

i 70

i 2

( i 72

)

i 37

Other comprehensive income

i 38

i 30

i 13

( i 43

)

i 38

Comprehensive income

i 75

i 100

i 15

( i 115

)

i 75

/ /

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the six months ended

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Consolidating

AND COMPREHENSIVE INCOME

Parent

Adjustments

Consolidated

Sales

—

i 1,671

i 818

( i 535

)

i 1,954

Operating expenses

Cost of sales, excluding depreciation and amortization

—

i 1,487

i 646

( i 535

)

i 1,598

Depreciation and amortization

—

i 76

i 31

—

i 107

Selling, general and administrative

( i 1

)

i 10

i 123

—

i 132

Impairment of long-lived assets

—

i 7

—

i 7

Closure and restructuring costs

i 15

i 12

i 1

—

i 28

Asset conversion costs

—

i 13

—

i 13

Other operating (income) loss, net

( i 1

)

( i 2

)

i 2

—

( i 1

)

i 13

i 1,603

i 803

( i 535

)

i 1,884

Operating (loss) income

( i 13

)

i 68

i 15

—

i 70

Interest expense (income), net

i 36

i 30

( i 31

)

—

i 35

Non-service components of net periodic benefit cost

—

( i 5

)

( i 7

)

—

( i 12

)

(Loss) earnings before income taxes

( i 49

)

i 43

i 53

—

i 47

Income tax (benefit) expense

( i 9

)

i 11

i 14

—

i 16

Share in earnings of equity accounted investees

i 61

i 45

—

( i 106

)

—

Earnings from continuing operations

i 21

i 77

i 39

( i 106

)

i 31

(Loss) earnings from discontinued operations, net of taxes

( i 13

)

( i 16

)

i 6

—

( i 23

)

Net earnings

i 8

i 61

i 45

( i 106

)

i 8

Other comprehensive income

i 122

i 112

i 89

( i 201

)

i 122

Comprehensive income

i 130

i 173

i 134

( i 307

)

i 130

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the three months ended

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Consolidating

(LOSS) AND COMPREHENSIVE INCOME (LOSS)

Parent

Adjustments

Consolidated

Sales

—

i 703

i 315

( i 216

)

i 802

Operating expenses

Cost of sales, excluding depreciation and amortization

—

i 665

i 244

( i 216

)

i 693

Depreciation and amortization

—

i 42

i 14

—

i 56

Selling, general and administrative

i 3

i 27

i 31

—

i 61

Closure and restructuring costs

—

i 1

—

i 1

Other operating loss (income), net

i 1

—

( i 6

)

—

( i 5

)

i 4

i 735

i 283

( i 216

)

i 806

Operating (loss) income

( i 4

)

( i 32

)

i 32

—

( i 4

)

Interest expense (income), net

i 16

i 19

( i 20

)

—

i 15

Non-service components of net periodic benefit cost

—

( i 3

)

( i 2

)

—

( i 5

)

(Loss) earnings before income taxes

( i 20

)

( i 48

)

i 54

—

( i 14

)

Income tax (benefit) expense

( i 92

)

i 53

i 28

—

( i 11

)

Share in earnings of equity accounted investees

( i 53

)

( i 112

)

—

i 165

—

Earnings (loss) from continuing operations

i 19

( i 213

)

i 26

i 165

( i 3

)

Earnings (loss) from discontinued operations, net of taxes

—

i 160

( i 138

)

—

i 22

Net earnings (loss)

i 19

( i 53

)

( i 112

)

i 165

i 19

Other comprehensive income

i 76

i 74

i 40

( i 114

)

i 76

Comprehensive income (loss)

i 95

i 21

( i 72

)

i 51

i 95

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the six months ended

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Consolidating

(LOSS) AND COMPREHENSIVE LOSS

Parent

Adjustments

Consolidated

Sales

—

i 1,613

i 664

( i 444

)

i 1,833

Operating expenses

Cost of sales, excluding depreciation and amortization

—

i 1,509

i 534

( i 444

)

i 1,599

Depreciation and amortization

—

i 85

i 29

—

i 114

Selling, general and administrative

i 5

i 31

i 91

—

i 127

Closure and restructuring costs

—

i 1

—

i 1

Other operating loss (income), net

i 1

i 3

( i 7

)

—

( i 3

)

i 6

i 1,629

i 647

( i 444

)

i 1,838

Operating (loss) income

( i 6

)

( i 16

)

i 17

—

( i 5

)

Interest expense (income), net

i 32

i 38

( i 41

)

—

i 29

Non-service components of net periodic benefit cost

—

( i 4

)

( i 5

)

—

( i 9

)

(Loss) earnings before income taxes and equity loss

( i 38

)

( i 50

)

i 63

—

( i 25

)

Income tax (benefit) expense

( i 94

)

i 60

i 26

—

( i 8

)

Equity method investment loss, net of taxes

—

i 1

—

i 1

Share in earnings of equity accounted investees

( i 32

)

( i 86

)

—

i 118

—

Earnings (loss) from continuing operations

i 24

( i 197

)

i 37

i 118

( i 18

)

Earnings (loss) from discontinued operations, net of taxes

—

i 165

( i 123

)

—

i 42

Net earnings (loss)

i 24

( i 32

)

( i 86

)

i 118

i 24

Other comprehensive loss

( i 39

)

( i 43

)

( i 33

)

i 76

( i 39

)

Comprehensive loss

( i 15

)

( i 75

)

( i 119

)

i 194

( i 15

)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Non-

Guarantor

Consolidating

CONDENSED CONSOLIDATING BALANCE SHEET

Parent

Adjustments

Consolidated

Assets

Current assets

Cash and cash equivalents

i 331

i 8

i 7

—

i 346

Receivables

i 1

i 109

i 410

—

i 520

Inventories

—

i 396

i 221

—

i 617

Prepaid expenses

i 15

i 44

i 8

—

i 67

Income and other taxes receivable

i 44

—

i 16

( i 16

)

i 44

Intercompany accounts

i 1,080

i 1,237

i 730

( i 3,047

)

—

Total current assets

i 1,471

i 1,794

i 1,392

( i 3,063

)

i 1,594

Property, plant and equipment, net

—

i 1,361

i 679

—

i 2,040

Operating lease right-of-use assets

—

i 41

i 9

—

i 50

Intangible assets, net

—

i 24

i 5

—

i 29

Investments in affiliates

i 2,846

i 1,825

—

( i 4,671

)

—

Intercompany long-term advances

i 5

—

i 1,266

( i 1,271

)

—

Other assets

i 28

i 40

i 153

( i 12

)

i 209

Total assets

i 4,350

i 5,085

i 3,504

( i 9,017

)

i 3,922

Liabilities and shareholders' equity

Current liabilities

Trade and other payables

i 18

i 363

i 158

—

i 539

Intercompany accounts

i 1,028

i 780

i 1,239

( i 3,047

)

—

Income and other taxes payable

i 3

i 24

i 8

( i 16

)

i 19

Operating lease liabilities due within one year

—

i 15

i 4

—

i 19

Long-term debt due within one year

—

i 1

—

i 1

Total current liabilities

i 1,049

i 1,182

i 1,410

( i 3,063

)

i 578

Long-term debt

i 495

—

i 8

—

i 503

Operating lease liabilities

—

i 39

i 5

—

i 44

Intercompany long-term loans

i 602

i 669

—

( i 1,271

)

—

Deferred income taxes and other

i 3

i 251

i 92

( i 12

)

i 334

Other liabilities and deferred credits

i 28

i 98

i 164

—

i 290

Shareholders' equity

i 2,173

i 2,846

i 1,825

( i 4,671

)

i 2,173

Total liabilities and shareholders' equity

i 4,350

i 5,085

i 3,504

( i 9,017

)

i 3,922

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

December 31, 2020

Non-

Guarantor

Consolidating

CONDENSED CONSOLIDATING BALANCE SHEET

Parent

Adjustments

Consolidated

Assets

Current assets

Cash and cash equivalents

i 208

i 5

i 96

—

i 309

Receivables

—

i 65

i 315

—

i 380

Inventories

—

i 425

i 205

—

i 630

Prepaid expenses

i 8

i 37

i 5

—

i 50

Income and other taxes receivable

i 36

—

i 18

—

i 54

Intercompany accounts

i 759

i 902

i 433

( i 2,094

)

—

Asset held for sale

—

i 488

i 648

( i 3

)

i 1,133

Total current assets

i 1,011

i 1,922

i 1,720

( i 2,097

)

i 2,556

Property, plant and equipment, net

—

i 1,348

i 675

—

i 2,023

Operating lease right-of-use assets

—

i 48

i 11

—

i 59

Intangible assets, net

—

i 24

i 5

—

i 29

Investments in affiliates

i 3,558

i 2,169

—

( i 5,727

)

—

Intercompany long-term advances

i 5

—

i 1,157

( i 1,162

)

—

Other assets

i 11

i 41

i 143

( i 6

)

i 189

Total assets

i 4,585

i 5,552

i 3,711

( i 8,992

)

i 4,856

Liabilities and shareholders' equity

Current liabilities

Trade and other payables

i 26

i 294

i 167

( i 3

)

i 484

Intercompany accounts

i 677

i 491

i 926

( i 2,094

)

—

Income and other taxes payable

i 3

i 11

i 1

—

i 15

Operating lease liabilities due within one year

—

i 15

i 5

i 20

Long-term debt due within one year

i 12

—

i 1

—

i 13

Liabilities held for sale

—

i 121

i 174

—

i 295

Total current liabilities

i 718

i 932

i 1,274

( i 2,097

)

i 827

Long-term debt

i 1,075

—

i 9

—

i 1,084

Operating lease liabilities

—

i 44

i 6

—

i 50

Intercompany long-term loans

i 509

i 653

—

( i 1,162

)

—

Deferred income taxes and other

—

i 237

i 90

( i 6

)

i 321

Other liabilities and deferred credits

i 23

i 128

i 163

—

i 314

Shareholders' equity

i 2,260

i 3,558

i 2,169

( i 5,727

)

i 2,260

Total liabilities and shareholders' equity

i 4,585

i 5,552

i 3,711

( i 8,992

)

i 4,856

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the six months ended

CONDENSED CONSOLIDATING STATEMENT OF

CASH FLOWS

Parent

Guarantor

Non-

Guarantor

Consolidating

Adjustments

Consolidated

Operating activities

Net earnings

i 8

i 61

i 45

( i 106

)

i 8

Changes in operating and intercompany assets and

liabilities and non-cash items, included in net

earnings

( i 48

)

i 59

( i 35

)

i 106

i 82

Cash flows (used for) provided from operating activities

( i 40

)

i 120

i 10

—

i 90

Investing activities

Additions to property, plant and equipment

—

( i 97

)

( i 25

)

—

( i 122

)

Proceeds from disposals of property, plant and equipment

—

i 1

—

i 1

Proceeds from sale of business, net of cash disposed

—

i 897

—

i 897

Cash flows (used for) provided from investing activities

—

( i 96

)

i 872

—

i 776

Financing activities

Stock repurchase

( i 223

)

—

( i 223

)

Repayments of long-term debt, including make-whole

premium

( i 605

)

—

( i 1

)

—

( i 606

)

Increase in long-term advances to related parties

—

( i 21

)

( i 970

)

i 991

—

Decrease in long-term advances to related parties

i 991

—

( i 991

)

—

Cash flows provided from (used for) financing activities

i 163

( i 21

)

( i 971

)

—

( i 829

)

Net increase (decrease) in cash and cash equivalents

i 123

i 3

( i 89

)

—

i 37

Cash and cash equivalents at beginning of period

i 208

i 5

i 96

—

i 309

Cash and cash equivalents at end of period

i 331

i 8

i 7

—

i 346

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the six months ended

CONDENSED CONSOLIDATING STATEMENT OF

CASH FLOWS

Parent

Guarantor

Non-

Guarantor